Happy Birthday, Hong Kong Dollar Peg

Thirty years ago today the Hong Kong’s dollar marriage with the U.S. dollar was born — the linked exchange rate regime that helps the financial city sail through crisis over crisis.

But while the peg has brought many benefits it’s also increasingly under criticism because it bolts Hong Kong’s monetary policy to that of the U.S., meaning the city has ultra low interest rates in recent years, sparking a surge in rising property prices.

Meanwhile a strengthening and increasingly liberalized Chinese yuan from just over the border has also pushed many to urge for a new peg with the Chinese currency instead.

Last year, in a rare call, Joseph Yam, former head of the Hong Kong Monetary Authority, who helped create the peg three decades ago, suggested the government should review the system and consider options including a switch to pegging to a basket of currencies or a complete float.

He isn’t alone. David Li, a long-serving head of Bank of East Asia, one of the major independent home-grown lenders, recently made it public to local newspapers that it is time to review the linked exchange rate regime.

Still, the peg has served the city well over the past three decades. In 1983, there was a severe lack of confidence in the Hong Kong dollar in the summer of 1983 as investors became increasingly anxious about the city’s future, after several rounds of Chinese-British negotiations on the then-British colony.

Under a floating exchange rate regime at that time, the Hong Kong dollar sharply depreciated and hit a record low of HK$9.60 per U.S. dollar in September after losing 13% in value in just two days.

Nervous residents queued outside supermarkets and emptied shelves for groceries and food, for fear of further weakening in the city’s currency.

The government decided to peg the Hong Kong dollar at HK$7.80 to the U.S. dollar in 1983, effective Oct 17, to stabilize the currency.

The Hong Kong Monetary Authority has always said that the peg regime has served as the cornerstone for the city’s monetary and financial stability–helping it weather through shocks and crises over the years.

But many argue that the regime has created a lot of pain, by importing inflation and shooting up asset prices in the city, as the U.S. dollar has remained weak in recent years.

The rising strength in the yuan has prompted some to urge for a repeg with the Chinese currency instead. For the first time, the use of the yuan has surpassed the Hong Kong dollar as the Chinese currency ranked among the top-10 most-traded currencies, according to the Bank for International Settlements.

It comes with China’s efforts to play a larger role in a market long dominated by the dollar and, to a lesser extent, the euro.

Norman Chan, chief executive of the HKMA, on Monday reiterated on the central bank’s website that: “It is too early to consider the use of the renminbi as our anchor currency while it is not yet freely convertible and the capital account of the mainland is still not fully liberalised.”